This is the third entry in a three-part series on “big picture money management for architects.”
Exposure Reduction
What kinds of exposure do architects live with? Contractual, liability, and financial. Let’s just talk about financial here. Our team of engineers is good and reliable. We also agree that we’re “pay when paid” in our all work. So far it’s been good. We agree that we’re in this together. The time when we share our exposure is when payment from the client is slow; we try to avoid that.
- We’ve taken a look at invoicing and streamlined it as much as possible. A clear, accurate invoice that is tied to the contract and is easily understood is more likely to get paid faster.
- At the beginning of a project, we’ll ask for the client’s criteria for submitted invoices: what’s required? job number? contract number? cost center? hard copy? electronic copy? We follow those “rules.”
- We get retainers upfront on all new clients; we stay on top of invoicing deadlines and stick to them. We try to set up all contracts as “cash transactions,” that is, when the particular drawings are complete, we get payment. We try not to extend any credit – ever. At least in Georgia, by allowing payments after the drawings are complete, you’ve extended credit by not specifically saying “payable upon completion of the work” (I know it’s goofy… that’s for another day).
- Sometimes, we’ll consider offering a 2% discount for payment net 10 if we need to extend credit (note: we really don’t like extending credit at all – ever).
- After invoices are sent we’ll follow up with an e-mail or phone call: “Did you receive it? Has it been entered for payment? Thank you!” This has head off “misdirected, lost 30 days” more times than I can count! Besides that, it’s another chance to chat with your client.
- Realize that ultimately “systematic and speedy” collections are perhaps the cornerstone of managing the financial risk exposure. When things don’t go right, take a look at a few articles by the SPP for more hints: http://aia.org/spf_nwsltr_0404 specifically “hire a black hat”
Ok, by now you should have a firm(er) handle on what you’re doing and what you need to be doing better. Anything you can share?
—Lisa Stacholy, AIA
Comments (4)
Good business practice is a given mandate. There is no point if you cannot get the job.
Let's add the making of good contracts to that list as a prerequisite. To limit liability, construction administration is essential, you can't prevent migration of the design intent or construction error if you are not part of the construction process. If you are not engaged to perform CA write the contract so that you have no liability for anything actually constructed.
The largest problem as small firms is competition with the uneducated, unqualified and unlicensed "DESIGNER" who has little or know liability and less design intelligence than the registered professional. many states have contrived the law in such a manner that small firms, already struggling to make a dollar must compete head to head with "DESIGNERS" on the basis of price. Architects are restrained by the licensing laws from engaging in certain types of business activity that "DESIGNERS" can engage in without sanction.
No amount of good management can make up for the dollars that such competitive inequities produce, write the licensing board in your state to urge them to shut down unlicensed practitioners. Only licensed architects are qualified to file technical submissions and the IBC and IRC section 106 is crystal clear.
Posted by Terry L. Walker, AIA | February 18, 2009 2:36 PM
Posted on February 18, 2009 14:36
Several years ago I hired a collection agency to deal with slow-paying clients. When I saw that they basically send ever-more-menacing form-letters, it became clear this is a waste of money and that there's not substitute for good business practices - timely invoicing, detailed listing of tasks completed, and communication. My "terms and conditions" now say what happens if payment is late: add interest or stop work, depending on delay. You simply Have To be willing to talk about money with your clients, and let them know what happens to your firm when payments are late. For me, there's a real impact on how we prioritize projects, our enthusiasm and creativity on a job, our willingness to extend ourselves. Clients know it's a quid-pro-quo and they now all and always pay within 30-45 days. By all means, don't extend credit - you are not the bank! And as Angel from El Paso says, deferring the payments makes it less likely they'll be made at all.
Posted by Deb Pierce | January 30, 2009 12:35 PM
Posted on January 30, 2009 12:35
It is probably "extending credit" because you're agreeing to take payment at a later date. I'd go back to the proposal letter or contract; if they requested it from the beginning, you need to live with it. If however, it came up when final payment was due that maybe a different issue - you might request that they deposit it in escrow (I think you can set up that kind of custodial account at your local bank). I do have one commercial developer who holds out 10%, but they promptly pay as soon as the permit is issued; so it hasn't been an issue for me. I have also started using permit expeditors (included in my scope of services) more often - that way when a client does make the request to withhold final payment until permit is issued - the permit is in my hands; it is a "cash transaction" when I turn over the permit, they turn over the check. (at least with Georgia law, I'm afforded some additional protections when it's a cash transaction).
Posted by Lisa Stacholy | January 14, 2009 12:53 PM
Posted on January 14, 2009 12:53
I practice architecture in El Paso, TX. Some of my latest clients have requested to hold some money back from us until the building permit has been issued. It sounds like a fair request but I've found that once they have their permit they lose interest in paying.
Do you consider this extending credit? Have you dealt with simiar requests?
Posted by Angel Ramos | January 7, 2009 9:47 PM
Posted on January 7, 2009 21:47